The [debt ceiling] stalemate may cost America its AAA rating, adding
$100 billion a year to government costs while dragging down economic growth.

As a matter of fact, on Friday the S&P rating agency downgraded the U.S.
credit rating from AAA to AA+. This is an unprecedented event and because of
that the effects are unclear as far as the stock market is concerned. In the
long term they are unclear because on one hand it's obvious that the credit
downgrade will make U.S. securities more risky and thus less attractive to
foreign investors, but on the other hand we know that when Canada lost its
AAA rating in April 1993, Canadian stocks rallied more than 15% in the subsequent
year. Japanese stocks moved over 25% higher in the 12 months after Moody's
downgraded Japan in November 1998.

In the short term the situation is complicated because some of this information
might have already been factored in in previous price levels and we could have
the "buy the rumor, sell the fact" type of event, which in this case would
mean "sell the rumor, buy the fact".

Speaking of facts, let's start with them. The U.S. has been downgraded from
AAA to AA+.
From S&P website we get the following definitions:

Note: Ratings from 'AA' to 'CCC' may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within the major rating categories.

Additional facts are:

Moody's and Fitch did not change their top credit rating for the U.S.

Credit ratings are used for calculating required rate of return (lower
rating -> bigger risk -> bigger payoff required for taking this additional
risk called the risk premium) and this means that they directly related to
US debt securities and indirectly to other US securities as well.

So, the U.S. has not been downgraded to "junk" status (like Greece), it's
been downgraded from extremely strong to very strong. This will have a small
impact on the risk premiums - perhaps 0.38% (compare country risk premium between
Aaa and Aa1 countries on this
website). So, the logical approach suggests that not much should change
- after all, this is a slight change of view on the U.S. credit, and a change
of view expressed by only one rating agency.

On the other hand, it's the world's biggest economic superpower that's no
longer top notch and it seems that this action will make many investors sell
their "riskless Treasuries" and buy other countries' notes/bonds or precious
metals instead. There's a lot of fear in the marketplace as the traditional
safe bet (Treasuries) doesn't appear as safe as it used to. This creates a
potentially positive environment for gold.

To determine whether the outlook for metals is in fact positive, let's move
on to the technical part of today's essay. We will start with the medium-term
S&P 500 Index chart (charts courtesy by http://stockcharts.com).

Declines seen on Thursday and Friday were followed by a huge move down on
Monday triggered by the U.S. debt downgrade. These observations lead us to
the obvious question of whether the decline will last longer. At this point,
the situation is very unclear, however based on Tuesday's strong rebound after
stocks touched the 38.2% Fibonacci retracement level visible on the above chart,
50-week moving average and other factors, it seems that at least a local bottom
has been formed.

This doesn't paint an overly bullish picture for gold for the following weeks,
as it has been negatively correlated with the main stock indices. In other
words, gold's rally can be to a large extent explained by the increased fear
among stock investors who dumped their holdings to buy gold. The US downgrade
has increased the tension.

With stocks perhaps at a local bottom, it seems that gold may form a short-term
top soon.

This becomes extremely important when you take into account the above long-term
chart and realize that right now gold is on the brink of $1,800. Yes, we were
bullish on gold just a few days ago, but that was also many tens of dollars
ago. With this volatility things can change very quickly.

Once the first shock is over, we may see markets come to their senses and
accept the fact that an AA+ rating for the U.S. debt is far from bad. Once
they do that, gold is likely to move lower, even though the long-term situation
has just (low interest rates at least until mid-2013) become even more favorable.

Summing up, the U.S. rating downgrade resulted in declines in the general
stock market and took the indices much lower. However, AA+ rating is not the
end of the world and investors may soon realize that have overreacted. Was
the final bottom reached? That is still unclear, however at least a short-term
move higher appears likely. Meanwhile, fueled by fear, gold might move just
a little higher, but as soon as things calm down, the yellow metal is likely
to decline - likely after topping close to $1,800.

To make sure that you are notified once the new features are implemented,
and get immediate access to my free thoughts on the market, including information
not available publicly, we urge you to sign up for our free e-mail list. Gold & Silver
Investors should definitely join us today and additionally get free,
7-day access to the Premium Sections on our website, including valuable tools
and unique charts. It's free and you may unsubscribe at any time.

Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who
takes advantage of the emotionality on the markets, and invites you to do
the same.

His company, Sunshine Profits, publishes analytical software that anyone can
use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem
that may never be solved, PR has changed the world of trading and investing
by enabling individuals to get easy access to the level of analysis that
was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are
results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals
sector. For that reason it is his main point of interest to help you make
the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for
professional excellence and ethics for the ultimate benefit of society.

Disclaimer: All essays, research and information found above represent
analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates
only. As such, it may prove wrong and be a subject to change without notice.
Opinions and analyses were based on data available to authors of respective
essays at the time of writing. Although the information provided above is
based on careful research and sources that are believed to be accurate, Przemyslaw
Radomski, CFA and his associates do not guarantee the accuracy or thoroughness
of the data or information reported. The opinions published above are neither
an offer nor a recommendation to purchase or sell any securities. Mr. Radomski
is not a Registered Securities Advisor. By reading Przemyslaw Radomski's,
CFA reports you fully agree that he will not be held responsible or liable
for any decisions you make regarding any information provided in these reports.
Investing, trading and speculation in any financial markets may involve high
risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates
as well as members of their families may have a short or long position in
any securities, including those mentioned in any of the reports or essays,
and may make additional purchases and/or sales of those securities without
notice.